The cybersecurity industry gets a lot of attention on Wall Street, and for good reason. Not only is this market vitally important to businesses across the globe, but the eye-popping performance of some newer cybersecurity companies has caught the eye of tech investors.
However, there's a more established player in this space that doesn't get as much attention as some of its newer peers. But Fortinet (FTNT 0.23%) has a long track record of success. Recent challenges have impacted the stock price, but the long-term prospects are still bright.
The stock journey
Over the trailing 12 months, Fortinet's stock is up 30%, outpacing the S&P 500. However, over that time frame, the stock has suffered two double-digit drops -- once after Fortinet released its second-quarter earnings report and again after releasing its third-quarter report.
These drops were logical to a degree. Fortinet's stock was trading at over 60 times earnings around the time of its Q2 2023 earnings release. Once a stock reaches that kind of valuation, any sign of weakness can send the stock tumbling.
In the aftermath of the latter tumble, Fortinet's stock fell to a price-to-earnings (P/E) multiple of 34, a considerable discount from where it was just a few months earlier. The stock has recovered since, in part due to the overall market's incredible end-of-year bull run, and now trades for a P/E of 48 -- not cheap, but still at a discount.
Year in review and a look ahead
Fortinet recently reported its fourth-quarter and full-year 2023 results and while the market has reacted favorably, the results were mixed. On the top line, Q4 revenue grew 10%, continuing a slowdown seen over the previous few quarters. However, it's worth pointing out that 2022 provided some challenging comparables. Revenue growth in the fourth quarter of 2022 was 33%.
Digging deeper into revenue, there are some encouraging signs. Service revenue, which represents approximately two-thirds of overall revenue, increased by 25%. This was largely in line with the last several quarters, indicating no slowdown in this part of the business.
The company felt the headwinds in its product revenue, which fell 10% year-over-year. Management attributed this to the tough comparable mentioned above since Q4 2022 product revenue grew by 43%. On the bright side, product bookings were up in the quarter.
Continued profitability
Despite the slower pace of revenue growth, Fortinet continues to grow its bottom line, demonstrating its efficiency as a business. In 2023, Fortinet's earnings increased 38% $1.46 per share.
Another bright spot for Fortinet and its shareholders is cash generation. In 2023, Fortinet generated $1.7 billion in free cash flow. This represented a 19% increase from 2022, when free cash flow grew by 20% compared to 2021.
Fortinet has also been buying back its own shares. Over the past five years, the company has reduced its shares outstanding by 10% -- good news for current and potential shareholders as this increases the value of each shareholder's stake in the company.
The bottom line for investors
Fortinet has a long track record of success. The company has been profitable and free-cash-flow positive in every year it has been a publicly traded company. Even in the face of slowing revenue growth over the past year, Fortinet has been able to keep its net income margin steady and continue to generate cash.
The near-term challenges have brought down the valuation, making shares more attractive now than they were just a few months ago. The stock still isn't cheap, but great businesses often trade for a premium. Fortinet's track record and position in this crucial industry makes it a no-brainer buy for me.
